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Asset Returns Under Periodic Revelations Of Earnings Management

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  • BO SUN

Abstract

The article investigates stock return dynamics in an environment where executives have an incentive to maximize their compensation by artificially inflating earnings. A principal–agent model with financial reporting and managerial effort is embedded in a Lucas asset‐pricing model with periodic revelations of the firm's underlying profitability. The return process generated from the model is consistent with a range of empirical regularities observed in the return data: volatility clustering, asymmetric volatility, and high idiosyncratic volatility. The calibration results further indicate that earnings management can be quantitatively important in accounting for the dynamic patterns of stock returns.

Suggested Citation

  • Bo Sun, 2014. "Asset Returns Under Periodic Revelations Of Earnings Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 255-282, February.
  • Handle: RePEc:wly:iecrev:v:55:y:2014:i::p:255-282
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    File URL: http://hdl.handle.net/10.1111/iere.2014.55.issue-1
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    Cited by:

    1. Du, Kai, 2019. "Investor expectations, earnings management, and asset prices," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 134-157.
    2. Xuan Tam & Eric Young & bo sun, 2014. "Regulatory Intensity, Crash Risk, and the Business Cycle," 2014 Meeting Papers 416, Society for Economic Dynamics.
    3. Bo Sun & Xuan S. Tam & Eric R. Young, 2020. "The Stock Market Response to a "Regulatory Sine Curve"," International Finance Discussion Papers 1299, Board of Governors of the Federal Reserve System (U.S.).

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